Most of us understand the importance of life insurance: to look after your loved ones by replacing your lost income earning ability if you were to die prematurely. But what happens to your income earning ability if you become ill or disabled? Critical illness (CI) and disability insurance (DI) are often overlooked, but are equally as important as life insurance. They protect you against the financial hardships while recovering from a critical illness or disability. Considering that statistically you have a greater chance of suffering a critical illness or disability than you do of dying prematurely, let’s look at these two types of coverage.
Why critical illness coverage? A critical illness is a diagnosis of cancer, heart attack, stroke, or up to 27 illnesses that CI insurance plans typically cover. It will pay out a lump sum payment between $10,000 and $2 million, depending on how much coverage you purchase. The CI lump sum payment has no restrictions. It can be used for anything you can think of: mortgage payments, experimental treatments abroad, expensive drugs, extra income, or just for that once-in-a-lifetime vacation. For benefits to be paid out, most policies require that your survive at least 30 days after diagnosis.
The nature of the one-time lump-sum benefit payment can also be a drawback, as once the money is spent, it’s gone. Unfortunately CI usually isn’t enough to keep you financially during a long-term serious illness or injury. For example, if you had a $25,000 policy and you made a claim at age 25, but you had a permanent disability as a result of your illness, once you make a claim, that’s all the money you are going to get from CI. This is where DI fills in the financial gap.
Why disability insurance? You can become disabled from either an injury or illness. DI protects your income up to age 65 and generally kicks in between 30-90 days after a disability occurs. If you choose coverage that begins paying earlier or for a longer period your premiums will be higher.
Be aware of the different definitions that your DI policy can fall under. “Any Occupation” means that you won’t receive benefits if you can work any other job, even as a cashier. “Regular Occupation” means you receive benefits if you can’t work at your regular job.
“Own Occupation” is the gold standard as you receive benefits for your regular occupation even if you work in another occupation. As with anything, the better the coverage the higher the premium. The best coverage is also not always available for occupations that are highly physical as the risk of suffering a disability are greater at a construction site than at a desk.
Disability insurance premiums differs from critical illness in the way that the premiums aren’t just based on your health and your age; they’re also based on your occupation. A 40-year-old landscaper will pay more than a 40-year-old pharmacist because the landscaper has a much higher risk of disability than the pharmacist.
Ideally you should have both CI and DI working in tandem with each other. A CI lump sum helps cover the immediate costs of a serious illness and recovery, while DI helps cover the long term effects of an extended illness or injury.
There’s lots to consider here, so it’s best to sit down with a trusted insurance professional and work out the coverage that’s appropriate and affordable for you.